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CIRCULAR No. 89/1999/TT-BTC OF JULY 16, 1999 GUIDING THE IMPLEMENTATION OF TAX PROVISIONS APPLICABLE TO VARIOUS INVESTMENT FORMS UNDER THE LAW ON FOREIGN INVESTMENT IN VIETNAM

Pursuant to the Law on Foreign Investment in Vietnam passed on November 12, 1996 by the National Assembly of the Socialist Republic of Vietnam;

Pursuant to the current tax laws and ordinances of the Socialist Republic of Vietnam and the Government�s decrees detailing the implementation of the tax laws and ordinances;

Pursuant to Decree No.12/CP of February 18, 1997 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam;

Pursuant to Decree No.36/CP of April 24, 1997 of the Government promulgating the Regulation on industrial parks, export processing zones and hi-tech parks;

Pursuant to Decree No.10/1998/ND-CP of January 23, 1998 of the Government on a number of measures to promote foreign direct investment;

Pursuant to Decree No.30/1998/ND-CP of May 13, 1998 of the Government detailing the implementation of the Law on Enterprise Income Tax;

Pursuant to Decree No.13/1999/ND-CP of March 17, 1999 of the Government on organization and operation of foreign credit institutions and their offices in Vietnam;

Pursuant to Decision No.53/1999/QD-TTg of March 26, 1999 of the Prime Minister on a number of measures to promote foreign direct investment;

The Ministry of Finance hereby guides the implementation of tax provisions applicable to various investment forms under the Law on Foreign Investment in Vietnam, as follows:

Part I

GENERAL PROVISIONS

1. This Circular shall apply to:

- Joint-venture enterprises and enterprises with 100% foreign investment capital, which are established under the Law on Foreign Investment in Vietnam.

- Joint-venture banks between Vietnamese banks and foreign banks.

- Joint-venture enterprises established on the basis of agreements concluded between the Government of the Socialist Republic of Vietnam and foreign governments. If an agreement contains provisions on tax obligations of joint-venture enterprises which are different from this Circular�s guidance, such agreement�s provisions shall apply.

- Foreign parties to business cooperation contracts (or foreign business cooperation parties for short) under the Law on Foreign Investment in Vietnam.

Particularly for the parties operating on the basis of build-operate-transfer (BOT) contracts, build-transfer-operate (BTO) contracts and build-transfer (BT) contracts, if their operation regulation promulgated by the Government prescribes tax obligations at variance with this Circular�s guidance, such operation regulation�s provisions shall apply.

2. A number of definitions:

- "Tax calculation year" is the calendar year starting on January 1st and ending on December 31 every year. In cases where foreign-invested enterprises and business cooperation parties are allowed by the Ministry of Finance to apply a twelve-month fiscal year other than the calendar year, the tax calculation year shall be the fiscal year allowed to be applied by such foreign-invested enterprises and business cooperation parties.

- "The first year with taxable income" is the first fiscal year when an enterprise generates taxable income, without offsetting losses carried forward from previous years.

- "A market price-free transaction or trading contract" is a transaction or trading contract affected by abnormal commercial relationships such as transactions between associated enterprises, which are bound together by set or imposed conditions other than those set among independent enterprises.

Two enterprises shall be considered being associated in the following cases:

(i) One enterprise directly or indirectly takes part in the management or control, or contributes to the legal capital or stock capital of the other enterprise;

(ii) Both enterprises are subject to direct or indirect management or control by another enterprise, or both enterprises receive capital contributed by another enterprise.

Part II

GUIDANCE FOR THE IMPLEMENTATION OF TAX PROVISIONS

I. ENTERPRISE INCOME TAX:

1. Taxable objects:

All income amounts earned from any economic activity of joint-venture enterprises, enterprises with 100% foreign investment capital, joint-venture banks (hereafter referred collectively to as the foreign-invested enterprises); foreign business cooperation parties, shall be subject to enterprise income tax, including:

- Income from business activities.

- Income from other activities.

2. Tax payers:

Foreign-invested enterprises and foreign business cooperation parties shall be enterprise income tax payers.

In cases where a foreign company simultaneously invests in many enterprises or business cooperation contracts, the enterprise income tax shall be calculated separately for each enterprise or each business cooperation contract.

3. Determination of taxable income:

Taxable Turnover Total reasonable

income calculation of and valid

in the tax = taxable income - expenses in + Other

calculation in the tax tax calculation incomes

year calculation year year

When determining their taxable income, the foreign-invested enterprises may offset the losses of the previous years as prescribed in Article 37 of the Government�s Decree No.30/1998/ND-CP of May 13, 1998 detailing the implementation of the Law on Enterprise Income Tax.

The loss transfer shall be effected by carrying forward the full loss amount of any tax calculation year into the year with income subsequent to the year of loss, and such loss amount may be offset by the income of subsequent years, or the loss amount of a given year may be evenly distributed into subsequent years with income expected to be earned by the enterprise. The enterprise must register with the tax authority its loss transfer method and follow through such registered loss transfer method and time.

The period for loss transfer shall not exceed 5 years from the year subsequent to the year when the loss arises.

a/ The turnover for calculation of taxable income in the tax year:

The turnover for calculation of taxable income of a foreign-invested enterprise or a foreign business cooperation party is the whole proceeds from the sale of goods and the provision of services (without value added tax) and other incomes of such enterprise or foreign business cooperation party in the tax calculation year. Particularly for enterprises that pay value added tax by method of direct calculation on added value, the turnover for calculation of taxable income shall include the value added tax.

In some specific cases, the turnover for calculation of taxable income shall be determined as follows:

- For goods sold by mode of installment payment, it is the turnover of sold goods calculated according to the lump-sum-payment selling price, and shall not include deferred payment interest.

- For goods or services used for exchange, as donations or gifts, it is calculated according to the selling price of products, goods or services of the same or equivalent type on the market at the time they are exchanged, donated or presented.

- For products for internal use, it is the production costs of such products.

- For goods processing activities, it is the money earned from the processing, including remuneration, costs of fuels, power, auxiliary materials and other expenses in service of such goods processing.

- For credit activities, it is the loan interest amounts that must be collected in the tax calculation year.

- For insurance and reinsurance business activities, the turnover for calculation of taxable income shall be the collectible insurance premium principals, expertise agency charge, reinsurance charge, reinsurance commissions and other revenues.

- For business cooperation contracts in the form of production sharing, it is the proceeds from the sale of products, which shall be calculated as follows:

+ If the shared products are sold on the Vietnamese market, the turnover shall be determined according to the selling price of the products on the Vietnamese market.

+ If the shared products are exported to foreign countries, the turnover shall be determined on the basis of the FOB export prices at Vietnamese border-gates.

If the foreign party fails to provide the product selling price or the sale of products is effected not according to the principle of market price-based transaction and trading, the turnover shall be determined according to the anti-price change principles prescribed in Section IV, Part III of this Circular.

b/ Reasonable and valid expenses in the year:

The expenses related to the generation of taxable income in the tax calculation year of a foreign-invested enterprise or a foreign business cooperation party, regardless of the accounting regime being applied, shall be determined to include the following:

b1. Depreciation and expenses for repair of fixed assets used for the production and business activities and/or the provision of services. The fixed asset depreciation rate shall be determined on the basis of such assets� use duration registered by the enterprise itself with the tax authority directly managing it in compliance with the provisions of Decision No.1062-TC/QD/CSTC of November 14, 1996 of the Minister of Finance. In cases where enterprises wish to register the asset use duration at variance with the provisions of Decision No.1062-TC/QD/CSTC, they must obtain the Ministry of Finance�s consent.

The fixed asset depreciation amounts that exceed the rate prescribed by the Ministry of Finance; depreciation amounts of fixed assets which have been fully depreciated, depreciation amounts of fixed assets not used in production and business such as: fixed assets awaiting liquidation or transfer for setting up of a new joint venture, etc., shall not be accounted into expenses when determining the taxable income.

b2. Costs of raw materials, materials, fuels, energy, production tools and goods actually used in the production activities or the provision of services related to the taxable turnover and income in the year.

b3. Salaries, wages, remuneration and payments of salary and wage nature, mid-shift meals and allowances and subsidies paid to Vietnamese and foreign laborers on the basis of labor contracts or collective labor agreements in compliance with the labor legislation applicable to foreign-invested enterprises.

b4. Expenses for scientific and technological research, innovations, environmental protection; expenses for storehouse and buildings maintenance, fight prevention and fighting; expenses for education and training, health-care, including such external health-care and education support as: contributions to study promotion fund, assistance for schools of handicapped children, homeless and supportless pupils, etc.

b5. Expenses on services purchased from outside:

- Expenses on power, water, telephone, stationary, audit hiring, printing of documents must be evidenced by vouchers and invoices according to the Ministry of Finance�s regulations.

- Liability or property insurance premiums under the insurance policies signed with Vietnamese insurance companies or other insurance companies licensed to lawfully operate in Vietnam (hereafter referred to as insurance enterprises). With regard to voluntary insurance operations whereby, according to international practice, an enterprise participating in insurance may opt for the place to buy the insurance, or if, at the time the insurance demand arises, the insurance enterprises cannot satisfy it, then the to-be-insured enterprise may get insured at a foreign insurance company. Insurance premiums shall be accounted into expenses when determining the taxable income.

- Expenses for hiring the overhaul of fixed assets in order to restore their capacity shall be accounted into production and business costs in the year. If the expense amount for one overhaul in the year is too large, it shall be distributed into the following year. For particular fixed assets requiring regular repairs, the enterprise is entitled to deduct in advance the overhaul expenses into the production and/or business costs on the basis of its overhaul expense estimates. If the advance deduction is lower than the actual overhaul expense, the enterprise may additionally account the difference into its expenses; if the advance deduction is higher than the actual overhaul expense, the expenses shall be accounted with decrease in the year.

- Expenses for procurement or payment for use of technical documents or services; expenses for transfer of technology, copyright, invention patents or trademarks under technology transfer or license contracts already approved by the Ministry of Science, Technology and Environment or other competent agencies.

- The fixed asset rentals shall be accounted into the production and/or business costs according to the amounts actually paid under the renting contracts. In cases where the fixed asset rental is paid in lump-sum for many years, such rental shall be gradually accounted into the production and business costs according to the number of years during which the fixed assets are used.

- Expenses for consultations or hiring management companies paid under the management hiring contracts already approved by the Ministry of Planning and Investment, and expenses for hiring other services from outside.

b6. Payments for female laborers as prescribed by law; expenses for labor safety, safeguarding of business establishments, remittances to the social and health insurance funds for laborers as the enterprises� obligation, or the trade union operation fund according to the prescribed regime.

b7. Banking fees, loan interests paid within the limit of the ceiling lending interest rate announced by the State Bank of Vietnam for domestic loans, banking fees and loan interest rate paid under credit contracts already approved by the State Bank of Vietnam for overseas loans. If a credit contract has not yet been approved by the State Bank of Vietnam, the interest rate and banking fee shall be determined according to the actual payments under the provisions of such credit contract but not in excess of the ceiling lending interest rate announced by the State Bank of Vietnam.

For joint-venture banks, they are reasonable interests and discounts paid for deposits, loans or other financial instruments.

All interests paid for loans related to the legal capital or charter capital (for banking activities) shall not be accounted into the reasonable and valid expenses when determining the taxable income.

b8. Reserves for decrease of prices of unsold goods, bad debts or decrease of securities prices, which are set aside by the enterprises under the Ministry of Finance�s guidance.

b9. Severance allowances for laborers according to the current regime.

b10. Expenses directly related to the circulation and sale of products or the provision of services, such as expenses for goods preservation and packaging, loading and unloading, transportation, storehouse and storeyard rent, warranty of products and goods.

b11. Expenses for advertisement, marketing, sale promotion, guest reception, festive occasions, transactions, external relations and conferences, and other expenses (including financial aids for humanitarian and charity activities of Vietnamese organizations and individuals), which must be evidenced by vouchers prescribed by the Ministry of Finance, associated with the business results and must not exceed the restricted levels prescribed below:

- For production, construction or transportation enterprises which have newly been established and operating, they must not exceed 7%, for the first two years of operation, then 5%, of the total amount of the above-listed expenses.

- For trading, food and drink catering and service business activities, they must not exceed 7%, for the first two years after the enterprises� establishment, then 5%, of the total amount of the above-listed expenses (excluding the cost prices of sold goods).

- For enterprises in such branches as electricity, petroleum gas, petroleum exploitation and refinement, petrol and oil trading, post and telecommunications, aviation,...they must not exceed 5%, for the first two years after such enterprises� establishment, then 3%, of the total amount of the above-listed expenses (particularly for trading activities, excluding the cost prices of sold goods).

In some particular cases where these expenses must be restricted to levels higher than the above-mentioned restricted levels, there must be the Ministry of Finance�s written approval. Nevertheless, such expenses must not exceed 7% of the total expense.

b12. Payable house and land rentals. In cases where the house and/or land-renting enterprises pay in advance the rentals for many years, these rentals shall be amortized throughout the rent term for which rentals are paid in advance.

b13. Payable taxes, tax-like fees and charges, excluding value added tax, enterprise income tax and tax on transfer of income abroad. Particularly for enterprises that pay value added tax by direct calculation method, these payments shall include value added tax.

b14. Expenses for meetings of the managing boards of joint-venture enterprises in compliance with such joint ventures� charters and/or resolutions of the managing boards.

All the above-mentioned expenses must be evidenced by valid vouchers, any expense amount without vouchers or with invalid vouchers must not be accounted into the allowable expenses when determining income liable to enterprise income tax. Enterprises must not account into their expenses the fines, the expenses not related to their turnover and taxable income such as expenses for capital construction investment, and expenses covered by other funding sources.

c/ Other incomes:

Other incomes of foreign-invested enterprises and foreign business cooperation parties include:

c1. Bank deposit and loan interests (excluding enterprises engaged in credit business); interests from the sale of goods with deferred payments.

c2. Foreign currency purchase and sale difference, securities purchase and sale difference, exchange rate difference (particularly, the exchange rate difference resulting from revaluation of the balance of cash, deposits, cash in transit, recoverable and payable debts in a foreign currency other than the currency permitted for accounting purpose shall not be included in other incomes).

c3. Income earned from the right to own and use the enterprise�s assets including income from the asset liquidation. In cases of losses or damage caused to the enterprise�s assets due to subjective reasons, those losses related to these assets must not be accounted into other incomes, and the wrongdoer(s) must be identified to make compensations for such losses according to the prescribed regime.

c4. Incomes earned from the recovery of bad debts that have been already written off from accounting books; from payable debts, of which the creditors cannot be identified; incomes discovered from the production and business activities in the previous years, which had been omitted.

c5. The year-end credit balance of the reserves for decrease of prices of unsold goods, bad debts, decrease of securities prices in enterprises.

c6. Incomes earned from capital contribution by enterprises:

Incomes earned from overseas business activities shall be accounted into other incomes for determination of taxable income.

In cases where the income tax on such income amounts has been paid overseas, the concerned enterprises shall determine the pre-overseas taxation income amounts in order to calculate income tax thereon to be paid in Vietnam according to the Law on Enterprise Income Tax. When determining payable income tax, the enterprises may subtract the income tax amount already paid overseas, but the deducted tax amount must not exceed the income tax amount calculated according to Vietnam�s Law on Enterprise Income Tax for such income.

All incomes earned after the payment of enterprise income tax from joint-venture or cooperation activities with domestic enterprises (including income from transfer of enterprises� contributed capital) shall not be accounted into other incomes when determining taxable income.

c7. Other incomes including service bounties in catering and hotel sectors; proceeds from sale of discarded materials and faulty products (after deducting sale expenses); donations, gifts...

d/ The method of calculating income subject to enterprise income tax applicable to enterprises engaged in property leasing business with rentals collected in advance for many years:

For enterprises engaged in leasing property such as houses, offices or infrastructure leasing business, with rentals collected in advance for many years, the income subject to enterprise income tax shall be determined as follows:

Taxable income Taxable income

Taxable derived from derived from

income in = turnover of + other activities + Other

the year advance in the year (C) incomes

(A) rentals (B)

Of which:

Taxable Expenses Other expenses

income Total related deducted in

derived turnover to the advance from

from = of - generation + previous years

turnover advance of taxable for this year and

of rentals turnover reserve expenses

advance arising in the allocated for

rentals (B) year (D) this year

Of which expenses related to the generation of taxable turnover arising in the year (D) shall be determined as follows:

d1. Fixed asset depreciation expenses:

For infrastructure business operation or dwelling house or office leasing business, they shall be the depreciation rate of assets directly related to the area for lease with lump-sum rental collection. Enterprises may register the duration for use of their fixed assets in compliance with the provisions at Point b.1 above.

In cases where the rental is collected in advance and the leasing term is shorter than the use duration registered by the enterprises with the tax authority, the asset depreciation shall be amortized throughout the actual leasing term.

In cases where there appear in the tax calculation year certain construction items for which the actual construction costs have not yet been determined, such construction items� costs shall be temporarily determined on the basis of cost estimates according to the economic-technical explanation report, and divided to the leasing area with lump-sum rental collection. When the project is completed, the final cost settlement shall include re-calculated actual construction cost. In cases where the actual construction cost is smaller than the estimated one, the difference shall be accounted into the income of the fiscal year when the project final settlement is made. In cases where the actual cost is larger than the estimated one, the enterprise shall use its reserve fund to make up for the deficit. If the reserve fund is not enough to make up for the deficit, the deficit shall be made up for by the income of that fiscal year.

d2. Other expenses deducted in advance for the advance turnover, concretely:

Other Total amount of other Area for Number

arising expenses arising in the lease of year

expenses tax calculation years with with

deducted = ��������� x advance x advance

in Total project�s area rental rental

advance intended for lease in the collection

turnover year

d3. The reserve expenses shall be equal to 5% of the total of the above-mentioned expenses.

Annually, other expenses and reserve expenses of the preceding years which are allocated to the current year shall be offset by the expenses arising in the year when calculating the taxable income. Particularly for years when losses are made, the enterprise may use the whole reserve fund to make up therefor.

- For enterprises engaged in infrastructure business or house and office leasing business, which are in the period of enjoying tax preferences, the taxable income on their advance turnover (B1) shall be determined as follows:

{ The number The }

B { of years number }

B1 = ��������� x { with advance - of }

The number of years { rental tax-free }

with advance rental { collection years }

collection

Of which:

The number The number of tax The number of years

of tax-free = free years under the - from the first year

years investment license with taxable income

Two years of tax reduction shall be calculated as a year of tax exemption

* Income from other activities (C):

Income Turnover

from other = from other - Arising expenses + Other incomes

activities (C) activities

Of which:

- Expenses shall not include infrastructure construction cost.

- Other expenses arising in the tax calculation year shall be determined as follows:

Other Total of other Other arising expenses deducted

expenses expenses in advance for advance turnover

arising = arising - �������������

in the tax in the tax Number of years with advance

calculation calculation collection

year year

During the period of enterprise income tax exemption or reduction, income from other activities shall be entitled to ordinary tax exemption or reduction. If losses are incurred from such activities, they shall be offset with the income from the advance turnover for determination of taxable income in the year.

The above-said method of calculating taxable income shall be used in making final tax settlement for enterprises doing business with export processing zone or industrial park infrastructure, and enterprises engaged in office and residential house leasing business (excluding those engaged in hotel business) as from the fiscal year of 1999. For years from 1998 backward, the final tax settlement shall comply with the Ministry of Finance�s Circular No.74-TC/TCT of October 20, 1997.

4. Determination of payable tax amount:

Payable enterprise Enterprise

income tax amount in = Taxable income x income tax

the tax calculation year rate

Of which:

- The income subject to enterprise income tax shall be determined according to provisions at Point 3 above.

- The enterprise income tax rate is specified in the investment license. For enterprises granted the investment licenses before January 1st, 1999, which have not yet been readjusted by the investment licensing agency, the applicable enterprise income tax rate shall be determined equal to the profit tax rate specified in the investment licenses. In cases where the investment licenses do not specify the enterprise income tax rate, the enterprise income tax rate of 25% shall apply.

In the course of operation, if a foreign-invested enterprise or a foreign business cooperation party fails to meet the criteria for enjoying preferential enterprise income tax rates and enterprise income tax exemption or reduction as prescribed in Articles 10 and 32 of Decree No.30/1998/ND-CP of May 13, 1998, Articles 6 and 7 of Decree No.10/1998/ND-CP of January 23, 1998 of the Government and Article 11 of Decision No.53/1999/QD-TTg of the Prime Minister, such enterprise or party shall not be entitled to the preferences. Annually, enterprises shall have to report to the investment licensing agency and their managing tax agency(ies) on the fulfillment of norms for enjoying preferences, and declare and pay enterprise income tax at the tax rate(s) commensurate to the norms fulfilled by enterprises. The tax agency(ies) directly managing the enterprises shall inspect and verify the norm fulfillment level for enjoying annual enterprise income tax preferences by each enterprise, which shall serve as basis for determining the payable tax amount of each enterprise.

In cases where an enterprise has for 3 consecutive years failed to meet the conditions for enjoying preferential enterprise income tax rates and enterprise income tax exemption or reduction as specified in its investment license, it shall have to promptly report to the investment licensing agency for readjustment of the tax rate and preferences inscribed in its investment license.

5. The procedures for registration, declaration and payment of enterprise income tax:

a/ Registration of enterprise income tax:

Enterprises shall have to register enterprise income tax together with the registration for payment of value added tax with the tax authorities directly managing them. In cases where an enterprise has branches or dependent-accounting outlets located in other localities, it shall have to make tax registration with the tax authorities of the localities where such branches or outlets are located. Such enterprise shall declare and pay enterprise income tax at the tax office in the locality where it is headquartered.

b/ Declaration of enterprise income tax:

By the 25th of the first month of each fiscal year at the latest, enterprises shall have to declare and submit declarations of tax amount temporarily paid for the whole year to the tax authorities of the localities where the enterprises are headquartered. The basis for declaration shall be the production and/or business results of the preceding fiscal year and the business prospects for the following year.

After receiving the declarations, the tax authority shall verify and determine the tax amounts temporarily paid for the whole year, then notify the enterprises of the tax amount to be temporarily paid in each quarter. In cases where the enterprises fail to declare or declare unclear basis for determining the tax amounts to be temporarily paid for the whole year, the tax agency shall fix such tax amounts.

In cases where in the year occurs major change in the taxable income, the tax agency shall readjust the tax amount to be temporarily paid. The readjustment shall be effected at the request of the enterprise after the enterprise makes its financial report for the first 6 months.

c/ Payment of enterprise income tax:

Enterprises shall temporarily pay enterprise income tax once every 3 months starting from the first day of the tax calculation year. The temporary tax payment shall be made according to the tax payment notice of the tax agency and not later than the last day of each quarter. At the end of the tax calculation year or upon the termination of business cooperation contract, the settlement shall be made according to actual figures.

For business cooperation contracts with a term of under one year, the enterprise income tax shall be paid in two installments, with the first installment temporarily paid in the middle of the contract term and the other to be paid upon the termination of the contract, and the settlement thereof shall be made according to the actual figures.

For business cooperation contracts with the method of determining business results or a particular method of calculating enterprise income tax, being specified in the investment licenses by the investment licensing agency, the tax calculation shall comply with the provisions in such investment licenses.

d/ Settlement of enterprise income tax:

The final settlement of enterprise income tax shall be made annually according to the provisions in Part III of this Circular.

6. Reimbursement of enterprise income tax as the result of reinvestment:

a/ Foreign investors who have fully made legal capital contributions under their investment licenses and used their shared income for reinvestment in projects in fields where investment is encouraged for 3 years or more shall be refunded by the Ministry of Finance part or whole of the enterprise income tax amount they have already paid for the income used for reinvestment reimbursed. The levels of enterprise income tax reimbursement as the result of reinvestment shall be as follows:

- 100% for reinvestment in projects subject to the enterprise income tax rate of 10% .

- 75% for reinvestment in projects subject to the enterprise income tax rate of 15%.

- 50% for reinvestment in projects subject to the enterprise income tax rate of 20%.

In cases where foreign investors use their shared income for reinvestment in projects that were licensed before November 23, 1996, the levels of enterprise income tax reimbursement as the result of reinvestment shall be as follows:

- 100% for reinvestment in projects subject to the enterprise income tax rates of up to 14%.

- 75% for reinvestment in projects subject to the enterprise income tax rates of from 15% to 20% .

- 50% for reinvestment in projects subject to the enterprise income tax rates of from 21% to under 25%.

In cases where foreign investors use their shared income of the years before 1996 for reinvestment for three years or more, to which readjusted investment licenses had been granted, or which had been approved by the Ministry of Planning and Investment before November 23, 1996, the enterprise income tax reimbursement level shall be 100%.

b/ The enterprise income tax amount to be reimbursed for the reinvested income shall be determined as follows:

L

Th = ������ x S x T

100% - S

Of which:

Th: is the enterprise income tax amount to be reimbursed.

L: is the after-enterprise income tax shared income amount used for reinvestment by the enterprise.

S: is the enterprise income tax rate stated in the investment license.

T: is the percentage of enterprise income tax to be reimbursed to the enterprise.

c/ The procedures for reimbursing enterprise income tax on reinvested income.

In order to get the enterprise income tax already paid for reinvested income amount reimbursed, foreign investors or their authorized persons shall have to fully produce the following documents to the tax authorities of the localities where the enterprises are headquartered:

- A written request or application for the reimbursement of enterprise income tax as the result of reinvestment. The application must clearly state the name, address and bank account number of the unit or individual that receives the reimbursed enterprise income tax for reinvestment.

- The foreign investor�s commitment to use such income for reinvestment for 3 years or more.

- The investment license (the notarized copy) or a readjusted investment license granted by the investment licensing agency, clearly stipulating that the investor is allowed to use his/her/its shared income for reinvestment.

- A written certification (the original or notarized copy) by the Managing Board, for joint-venture enterprises, or by an auditing organization, for enterprises with 100% foreign investment capital or foreign business cooperation parties, that the foreign party has fully contributed its share to the legal capital.

- A declaration of reinvested income.

- Vouchers on tax payment by the enterprise (the notarized copies) and the State Treasury�s certification of the enterprise income tax amount already paid.

Upon receiving in full the above-mentioned documents, the local tax authority shall verify such documents, determine the amount of enterprise income tax already paid by the enterprise and calculate the amount of enterprise income tax to be reimbursed to the investor, then send the enterprise income tax reimbursement application dossier to the Ministry of Finance (the Budget Department) for consideration and decision on tax reimbursement to the investor.

Within 30 days after receiving the complete dossier, the Ministry of Finance shall notify the investor of its decision.

Where the investors fail to make reinvestments, they shall have to return the reimbursed enterprise income tax amount plus the interests thereon calculated according to the bank deposit interest rate from the date they receive the reimbursed tax amounts to the time they return such reimbursed amounts to the State budget and shall be handled according to law.

II. TAX ON TRANSFER OF INCOME ABROAD

1. Taxable objects:

Incomes earned by foreign economic organizations or individuals from their investment in any of the forms specified in the Law on Foreign Investment in Vietnam (including the reimbursed amount of income tax on reinvested income amount and income from the capital transfer) shall be subject to tax on transfer of income abroad when being transferred out of the Vietnamese territory or retained outside Vietnam.

All cases where a foreign party uses its shared income to pay debts of its parent company, or to cover expenditures of the Vietnam-based representative office(s) of its parent company, shall be considered the transfer of income abroad, and such foreign party shall have to pay tax on the transfer of income abroad.

Foreign economic organizations or individuals having income transferred abroad shall have to declare and pay tax on the transfer of income abroad.

2. Determination of payable tax:

The payable tax on the transfer of income abroad shall be determined equal to the income amount transferred abroad or considered being transferred abroad, or the income amount retained outside the Vietnamese territory by the investor, multiplied (x) by the income transfer tax rate stipulated in the investment license. In cases where the granted investment license does not specify the rate of tax on transfer of income abroad, such tax rate shall comply with Article 12 of Decree No.30/1998/ND-CP of May 13, 1998 of the Government and Article 11 of Decision No.53/1999/QD-TTg of March 26, 1999 of the Prime Minister.

3. The procedures for tax payment:

- Tax on the transfer of income abroad shall be collected upon each transfer of income abroad. Particularly for cases where investors retain their income outside Vietnam, pay debts for their parent companies or cover expenses of the latter�s offices in Vietnam, the tax declaration, payment and collection shall be made on a monthly basis.

- Before transferring income abroad or no later than the 5th of the following month in cases where the income is used for purposes deemed to be the transfer of income abroad or the retention of income outside the Vietnamese territory, a foreign economic organization or individual shall make and submit a tax declaration to the tax authority directly managing the enterprise in which such foreign economic organization or individual has invested capital and, at the same time, pay the declared tax amount into the State Treasury.

Within 5 days after receiving the tax declaration, the tax authority shall examine the declaration and, in cases where it discovers any errors in such tax declaration, issue a notice of payable tax amount to the foreign investor. The foreign investor shall have to pay the outstanding tax amount into the State Treasury according to the tax authority�s notice. In cases where the investor fails to submit the tax declaration within the prescribed time limit, the tax authority may set the tax amount to be temporarily paid, issue a tax notice and impose a fine for delayed tax declaration.

The State Treasury shall hand over to the taxpayer a receipt of income transfer tax payment so that the latter can carry out the procedure for the transfer of income abroad.

Annually, within 90 days from the end of the fiscal year, the foreign investors shall report to the tax authority(ies) directly managing the enterprises their shared incomes, the use of incomes and the payment of tax on transfer of income abroad with regard to the income amounts shared in the previous years. In cases where a foreign investor has already paid tax on the transfer of income abroad, but in fact did not transfer his/her/its income abroad or not use it for purposes deemed to be the transfer of income abroad, he/she/it shall be refunded the paid tax amount. The dossier applying for reimbursement of the paid tax shall comprise:

- An application for reimbursement of the paid tax amount. The application must clearly state the reason(s) of application for tax reimbursement, the name, address and bank account number of the applicant.

- A list of the paid tax amounts accompanied by vouchers (copies) of the payments to the State Treasury and the State Treasury�s certification of the paid tax amounts (clearly stating the chapter, category, clause and item of the budget content index where the tax amounts have been paid to).

- The tax authority�s certification of the paid tax amounts.

The tax reimbursement application dossier shall be filed to the Ministry of Finance (the Budget Department) for verification and decision on the reimbursement of the paid tax amount.

III. EXPORT TAX AND IMPORT TAX

All goods which foreign-invested enterprises and business cooperation parties are permitted to export or import across the Vietnamese border, including goods from the Vietnamese market sold to enterprises in export processing zones and goods from enterprises in export processing zones sold into the Vietnamese market, shall be subject to export tax and/or import tax according to the Law on Export Tax and Import Tax.

1. Export and/or import tax exemption or reduction:

a/ Export tax:

Goods sold by domestic enterprises and individuals (including foreign-invested enterprises) to export processing enterprises shall be exempt from export tax according to Article 8 of Decision No.53/1999/QD-TTg of March 26, 1999 of the Prime Minister.

The enterprises, when selling goods to export processing enterprises, shall only have to make and submit export goods declarations to the export processing zones� customs authorities. The customs authorities shall affix "duty-free goods" stamp on the goods declarations after the goods inspection.

b/ Import tax:

In addition to the cases of tax exemption and reduction specified in the Law on Export Tax and Import Tax, foreign-invested enterprises and business cooperation parties shall be entitled to tax exemption or reduction according to Article 63 of Decree No.12-CP of February 18, 1997 and Articles 10 and 13 of Decree No.10/1998/ND-CP of January 23, 1998 of the Government, and Article 11 of Decision No.53/1999/QD-TTg of March 26, 1999 of the Prime Minister.

- The competence to consider tax exemption for eligible cases specified in Article 63 of Decree No.12-CP of February 18, 1997 shall be as follows:

Based on the investment license and the economic-technical explanation for each project, the Ministry of Trade or the authorized agency shall consider and approve the list of duty-free import goods items for each enterprise.

Based on the approved list of duty-free import goods items, the Customs Departments of the provinces and centrally-run cities shall monitor the import activities of enterprises. Quarterly, the Customs Department shall submit a sum-up report to the Ministry of Finance and the General Department of Customs on the export and import turnovers and the volumes of the major export and import goods items of foreign-invested enterprises.

- The procedures for import tax exemption or reduction for eligible cases specified in Articles 10 and 13 of Decree No.10/1998/ND-CP of January 23, 1998 of the Government shall comply with the guidance of Circular No.63/1998/TT-BTC of May 13, 1998 of the Ministry of Finance.

- The procedures for import tax exemption for raw materials of projects for manufacture of mechanical, electric and electronic components and spare parts shall comply with the provisions in Article 11 of Decision No.53/1999/QD-TTg of March 26, 1999 of the Prime Minister;

The projects for manufacture of mechanical, electric and electronic components and spare parts shall be exempt from import tax on production raw materials for 3 years from the date the manufacture is commenced. In cases where an enterprise is concurrently eligible for preferences provided for in Article 11 of Decision No.53/1999/QD-TTg and those provided for at Point 3, Article 10 of Decree No.10/1998/ND-CP of the Government, it may choose to enjoy preferences provided for in either of the two said documents. Operating enterprises shall be exempt from import tax for lots of imported raw materials according to their customs declarations opened as from April 10, 1999 and for a period of 3 years (calendar year) from the year they commence their production. The procedures for import tax exemption shall be as follows:

+ The investment license (copy) granted by the competent agency, clearly stating that the enterprise has the function of manufacturing components and spare parts.

+ A written request for import tax exemption for production raw materials to be sent to the Ministry of Trade or an authorized agency.

+ The production plan of the year and the volume of raw materials planned to be imported in service of the production.

Basing itself on the enterprise�s annual production plan, the Ministry of Trade or the authorized agency shall give the list of tax-free import raw materials to the enterprise. For the operating enterprises, the 1999 list of tax-free imports shall not include the volume of raw materials they have already imported according to the customs declarations made before April 10, 1999.

Basing themselves on the list of tax-free import raw materials, the provincial/municipal Customs Departments shall monitor the import by the enterprises.

2. Declaration and retrospective collection of export tax and import tax arrears:

- In cases where export processing enterprises purchase goods, materials and raw materials from the domestic market and export them to foreign countries instead of putting them into production and/or processing, they shall have to pay export tax according to the current export tariff.

- If the imported goods of foreign-invested enterprises and foreign business cooperation parties, which have been exempt from import tax as specified in the above cases, are used for purposes other than those approved for import tax exemption, or sold on the Vietnamese market, they must be permitted by the Ministry of Trade and the tax amounts already exempted shall be retrospectively collected.

For goods imported at the time the Law on Special Consumption Tax was yet effective, which were already exempt from import tax, but used for purposes other than the original purpose or sold on the Vietnamese market after the Law on Special Consumption Tax takes effect, the concerned foreign-invested enterprises or foreign business cooperation parties shall, besides having to pay the import tax arrears (at the tax rate applicable at the time of retrospective payment), have to pay special consumption tax for those goods subject thereto.

- Within 2 days from the date the imported goods are used for purposes other than the purposes for which they are exempt from import tax, or for sale, the concerned foreign-invested enterprises or business cooperation parties shall have to submit declarations thereof to the customs departments of the provinces and cities where the enterprises� executive head offices are located, or the customs authorities of the localities where such goods were sold, or the customs authorities of the localities where the enterprises register the import goods declarations. Past that time limit, if the enterprises or business cooperation parties fail to submit such declarations, they shall be sanctioned for tax evasion according to the provisions of the Law on Export Tax and Import Tax and the Law on Special Consumption Tax.

In cases where the enterprises manufacturing mechanical, electric or electronic components and spare parts, and enjoying import tax exemption for production raw materials for 3 years from the year they commence their production as prescribed in Point 2, Article 11 of Decision No.53/1999/QD-TTg of March 26, 1999 of the Prime Minister have not used up such raw materials within the grace period or used them for wrong purposes, the import tax thereon shall be retrospectively collected. Within 2 days after they use the raw materials for the wrong purposes, the enterprises shall have to declare and retrospectively pay import tax as prescribed.

Within the first quarter of each year, the enterprises shall have to report to the Ministry of Trade, the customs authorities and the tax authorities directly managing them on the volume of tax-free imported raw materials, the volume of raw materials already used in the production and the volume of raw materials used for other purposes in the preceding years.

The provincial/municipal tax departments shall have to make final settlement of accounts on the import and use of raw materials volumes already exempt from import tax by the enterprises.

- The import tax and special consumption tax arrears to be retrospectively collected shall be deter-mined according to the tax calculation bases, including the tax rates, exchange rates, the tax calculation prices at the time of sale under the provisions of the Law on Export Tax and Import Tax and the Law on Special Consumption Tax currently in force.

- In the course of managing the collection of taxes from foreign-invested enterprises and business cooperation parties, the authorities managing the tax collection from foreign-invested enterprises and business cooperation parties shall have to supervise the use of tax-free export and import goods and, upon discovery of any sale of such tax-free goods, the directors of the provincial/municipal tax departments shall, besides collecting value added tax according to the Law on Value Added Tax, have the power to issue decisions on the retrospective collection of import tax arrears and impose fines according to the Law on Export Tax and Import Tax.

IV. TAX ON INCOME FROM CAPITAL TRANSFER

Foreign investors that transfer their contributed capital shares in joint-venture enterprises, enterprises with 100% foreign investment capital or business cooperation contracts according to Article 34 of the Law on Foreign Investment in Vietnam shall pay tax on income from the capital transfer according to the provisions of this Circular.

Taxes on income from capital transfer shall include enterprise income tax and tax on transfer of income abroad. Concretely:

1. Enterprise income tax:

Income earned from capital transfer activities shall be subject to enterprise income tax under the Law on Foreign Investment in Vietnam.

Payable Enterprise income tax

enterprise = Taxable income x rate applicable to income

in come from capital transfer

1.1 Taxable income:

Initial value of

Taxable = Transfer value - the transferred - Transfer

income capital amount expenses

Of which:

+ The transfer value shall be determined as the total actual value that the transferor receives under the transfer contract. In cases where the transfer contract does not specify the payment price or the payment price cannot be determined according to the principle of market price-based transactions between the transferor and the transferee, the tax authority may examine and determine the contract�s payment value on the basis of reference to the market prices and similar transfer contracts.

+ The initial value of the transferred capital amount shall be determined on the basis of accounting books and vouchers on the investor�s contributed capital at the time of capital transfer, which is recognized by the joint venture enterprise managing board, for joint-venture enterprises, or the auditing results from the auditing organization, for enterprises with 100% foreign investment capital, or by business cooperation parties in compliance with the Vietnamese laws currently in force.

In cases where the subsequent investors further transfer their contributed capital shares, the initial value of the transferred capital amount in each subsequent transfer shall be determined equal to the value of the preceding transfer contract plus the actual value of any additionally contributed capital (if any) determined on the principle stated in this Clause.

+ Transfer expenses mean the actual expenses directly related to the transfer, based on the original vouchers recognized by the tax authorities. In cases where transfer expenses arise overseas, such original vouchers must be certified by a public notary or an independent auditing agency of the country where the expenses arise.

Transfer expenses include expenses for the completion of legal procedures necessary for the transfer; charges and fees which must be paid when the transfer procedures are carried out; expenses for transactions, negotiations and signing of transfer contracts... evidenced by valid vouchers.

1.2. Enterprise income tax rate:

- The rate of enterprise income tax on income from capital transfer shall be 25%.

- In cases where a foreign investor transfers capital to a Vietnamese State enterprise or to an enterprise in which the State holds the controlling stake, such foreign investor shall be exempt from enterprise income tax. The exemption of enterprise income tax on income from capital transfer shall be approved by a competent agency in the written approval of the capital transfer.

- In cases where a foreign investor transfers capital to a Vietnamese enterprise other than those mentioned above, such investor shall be entitled to 50% reduction of payable enterprise income tax amount.

1.3. Procedures for tax declaration and payment:

Within 5 working days after the competent agency approves the capital transfer, the capital transferor or his/her mandatory (including cases where the transferor is exempt from enterprise income tax on income from capital transfer) shall have to make and submit a declaration of enterprise income tax on income from capital transfer to the local tax authority managing the enterprise in which the transferor invests capital, enclosed with the transfer contract, the competent agency�s decision to approve the capital transfer, a copy of the decision on the establishment of the enterprise receiving the transferred capital (in cases of Vietnamese enterprises), certification of contributed capital and original vouchers on expenses, and, at the same time, pay in full the payable tax amount to the State Treasury and send a copy of the tax payment voucher to the agency which has approved the capital transfer.

Where inaccuracy is found in the declaration or calculation of payable tax amount, the tax authority shall, within 5 working days after receiving the declaration, notify the tax-payer of the payable tax amount or request the tax-payer to provide the necessary documents for an accurate calculation of the payable tax amount.

2. Tax on transfer of income abroad:

Foreign investors with income from capital transfer, after paying tax on income from capital transfer under the guidance at Point 1 above and transferring or retaining their income abroad, shall have to pay tax on transfer of income abroad under the guidance in Clause e, Point 2, Section V, Part B and Section V, Part C of Circular No.99/1998/TT-BTC of July 14, 1998 of the Ministry of Finance.

V. OTHER TAXES AND FINANCIAL OBLIGATIONS

Other taxes and financial obligations such as value added tax, special consumption tax, excise tax, natural resources tax, and land, water and sea surface rents... applicable to foreign-invested enterprises and foreign business cooperation parties shall comply with the regulations in current legal documents of the Socialist Republic of Vietnam.

Part III

TAX SETTLEMENT AND INSPECTION OF TAX PAYMENT IN LOCALITIES

I. ANNUAL TAX SETTLEMENT

At the end of each fiscal year, foreign-invested enterprises or foreign business cooperation parties shall make and submit reports on tax settlement to the tax authorities. The annual tax settlement shall be carried out in accordance with the following regulations:

1. Within 60 days after the end of the fiscal year, the foreign-invested enterprises and foreign business cooperation parties shall submit their reports on production and business activities, accounting reports audited by independent auditing organizations licensed to operate in Vietnam, reports on enterprise income tax settlement and reports on settlement of taxes payable in the year to the tax authorities of localities where their executive head offices are located.

Within 10 working days after the above-said tax settlement reports are submitted as prescribed, the foreign-invested enterprises or business cooperation parties shall have to pay the outstanding tax amounts according to their settlement reports to the State budget. If past that 10 day-time limit, the enterprises still fail to pay the outstanding tax amounts, they shall also have to pay fines for late payment as prescribed.

The foreign-invested enterprises or business cooperation parties shall not be permitted to clear an overpayment of one tax against a underpayment of another tax when making their annual tax settlements.

2. Basing themselves on the reports on business and production activities and financial statements of enterprises, the tax departments of the provinces and centrally-run cities shall re-calculate payable amounts of each tax in the fiscal year and, at the same time, compare these amounts with those in the tax declarations periodically submitted during the year in order to verify the accuracy of these declarations and tax settlement reports. Where tax settlement reports have been made inaccurately, the tax authorities shall organize the inspection of tax payment by enterprises.

II. INSPECTION OF TAX PAYMENT BY ENTERPRISES

In the course of tax management of foreign-invested enterprises and foreign business cooperation parties, the provincial/municipal tax departments shall have to organize regular or irregular tax inspections at enterprises when necessary. They shall, at least once a year, inspect the tax payment by the following subjects:

- Enterprises which, according to their financial settlement reports, make no profits in the period of tax exemption or reduction.

- Enterprises which have large turnover amounts.

- Enterprises which make inaccurate or unclear tax settlement reports, or their tax settlement reports do not fully specify the indices for tax calculation.

- Enterprises which fail to submit their tax settlement reports or fail to submit them within the prescribed time limit.

- Enterprises which see major changes in their financial situation during the tax calculation year as compared to the previous years.

For the other enterprises, the provincial/municipal tax departments shall have to organize the inspection at least once every 3 years.

Before inspecting foreign-invested enterprises or foreign business cooperation parties, the tax authorities shall have to issue inspection decisions clearly stating the contents and duration of the inspection. The inspection decisions shall be sent to the foreign-invested enterprises or the representatives of the foreign business cooperation parties 3 days before the inspection begins. Where it is necessary to inspect contents other than those stated in the inspection decisions or to prolong the inspection time, the tax authorities shall have to issue additional inspection decisions.

The inspection results shall be recorded in minutes signed by the authorized representatives of the enterprises or foreign business cooperation parties and the representative of the tax authorities conducting the inspections. The tax authorities shall have to submit such inspection minutes to the Ministry of Finance (the General Tax Department) together with the enterprises� financial statements (copies).

If a foreign-invested enterprise or foreign business cooperation party disagrees with the tax authority�s conclusions in the inspection minutes, it may lodge complaints to the General Tax Department and the Ministry of Finance. Pending the settlement of the complaints, the enterprise or the foreign business cooperation party shall have to strictly abide by the tax authority�s conclusions.

III. TAX SETTLEMENT UPON THE EXPIRY OF OPERATING DURATION OR DISSOLUTION OF FOREIGN-INVESTED ENTERPRISES OR FOREIGN BUSINESS COOPERATION PARTIES

Upon the termination of a business cooperation contract by the parties thereto, or the expiry of the operating duration or the dissolution of a foreign-invested enterprise under the Law on Foreign Investment in Vietnam, the concerned foreign-invested enterprise shall, within 45 days after the investment licensing agency issues the dissolution decision, have to make and submit its tax settlement report to the tax authority. The tax authority shall have to proceed immediately with the followings:

1. Examination of the tax settlement report.

2. Determination of the rights and obligations of each party to the foreign-invested enterprise or the business cooperation contract, with the following principal contents:

- Determination of the invested capital amounts of the investors currently on the enterprise�s account(s), including capital in cash, fixed assets, materials and goods... Confirmation of the invested capital amounts which the foreign investors may transfer abroad.

- Determination of profits or losses, and the rights and responsibilities of the investors related to such profits or losses. Confirmation of the income amounts which the foreign investors are entitled to and may transfer abroad. The amount of tax on transfer of such income abroad shall be immediately collected for the State budget except where the foreign investors can produce documents proving that such income amounts will not be transferred abroad for one of the following reasons:

+ It is used for reinvestment in Vietnam by decisions of the investment licensing agency.

+ It is used for personal spending needs in Vietnam, in addition to other incomes already declared.

+ It is used for other purposes in Vietnam.

IV. MEASURES AGAINST THE PRICE CHANGE

To ensure the correct determination of tax payment obligations of enterprises, during the regular inspection or the examination of tax settlement reports of enterprises, if any price or income ratio irrationality is detected in the transactions among associated enterprises, the tax authorities shall apply the following anti-price change measures in order to accurately determine the taxable incomes of enterprises:

1. Method of comparing market prices:

The tax authorities may use the market prices of products, goods or services to determine the prices of those exchanged or traded internally among associated enterprises. The conditions for the application of market price comparison method are:

(i) There is no difference between the two compared business operations, which affect the transaction prices, such as goods quality, trademarks, delivery conditions, mode of payment.

(ii) In cases of difference between the two compared business operations, calculation methods may be applied to preclude the factors affecting the transaction prices.

For example: A British lubricant company sells to Vietnam-based joint-venture enterprise A (a joint-venture between such British company and a company in Vietnam), 1,200 liters of lubricant for 1,500 USD, to be paid after 6 months. At the same time, the British company sells to enterprise B, an independent enterprise in Vietnam, 1,000 liters of lubricant for 1,000 USD, to be paid immediately. Supposing that the 6-month commercial credit interest rate on the market is 10%. When determining income of joint-venture enterprise A, the Vietnamese tax authority may re-determine the contractual lubricant price on the basis of the comparative price according to the contract with company B, as follows:

Unit price of 1 liter of lubricant, with payment made after 6 months:

1,000 USD + 1,000 USD x 10%

������������� = 1.1 USD/liter

1,000 liters of lubricant

The price determined for the contract between the joint-venture company and the British company shall be:

1,200 liters x 1.1 USD/liter = 1,320 USD

2. Method of using the selling price to determine the purchase price:

In cases where a trade unit purchases goods supplied by an overseas associated enterprise and it is impossible to determine the actual purchase prices on the free market, the tax authority may use the selling price of the trade unit to determine the purchase price according to the following formula:

Selling price { Selling price The average }

independent { to independent aggregate }

Purchase = enterprises - { enterprises x profit }

price (excluding { (excluding margin of }

import tax, { import tax, the trade }

if any) { if any) service }

The average aggregate profit margin of the trade service may be determined on the basis of the aggregate profit margin of other goods purchased by such unit from independent enterprises and sold to independent enterprises, or the aggregate profit margin of other independent trade units. The aggregate profit margin shall be determined according to the following formula:

Aggregate Net turnover - Cost price of sold goods

profit = ���������������� x 100%

margin Net turnover

(The data shall be based on the enterprises� reports on business results).

The method of using the selling price to determine the purchase price shall not apply to the following cases where:

- The goods and products, before being sold, were already processed, assembled, transformed or value added;

- The goods and products, before being sold, were affixed with trademarks, trade names of high value on the market.

- The period between the goods purchase and the goods sale lasts for more than one year and, during that period the market witnessed a great price fluctuation.

For example: Enterprise A in Vietnam is an enterprise with 100% foreign capital invested by company B which produces liquor in France. Enterprise A is the sole outlet for company B�s products on the Vietnamese market. In 1999, enterprise A imported from company B 10,000 liters of liquor, paid 75,000 USD for import tax and special consumption tax set by the customs office, and sold the whole liquor volume for 185,000 USD as converted turnover within the year. By the end of 1999, the tax authority shall determine the purchase price of the liquor of enterprise A as follows:

Net turnover = Sale turnover - Import tax

= 185,000USD - 75,000USD = 110,000 USD

Selling price 110,000 USD

(excluding = ������� = 11 USD/liter

import tax) 10,000 liters

Assuming that the average aggregate profit margin of liquor trading is 10%,

Purchase = 11USD/liter - (11USD/liter x 10%) = 9.9USD/liter

price

3. Method of using total production cost to determine the taxable income

In cases where an unit produces and/or processes semi-products and delivers all to an associated enterprise, without products being sold on the market, to determine the comparative price, the tax authority may base itself on the accounting books and records of the units� expenses to determine the income of that unit according to the following formula:

Total Average net

Determined income = production x income rate of cost of all the production

products branch

Total

production Cost price Goods General

cost of all of goods delivery management

products = delivered + expenses + expenses

delivered in the in the in the

in the period period period period

The average net income rate of the production branch may be determined on the basis of data on the net income rates of other independent production enterprises.

The net income rate shall be determined according to the following formula:

Net Before-enterprise income tax net income

income = �������������������

rate Cost price General of goods + Sale expenses + management

sold expenses

(The data shall be based on the enterprises� reports on business results)

For example: Garment enterprise A in Vietnam is a joint venture between company B from the Republic of Korea and a Vietnamese company. Garment enterprise A produces under processing contracts apparel articles and delivers them all to company B in the Republic of Korea. Assuming that in 1999 enterprise A delivered to company B 10,000 suits at a set price of 10 USD/suit. The accounting books and records of enterprise A in 1999 contain the following data:

Cost price of sold goods 80,000 USD

Delivery expenses 6,000 USD

General management expenses 12,000 USD

Total production cost 98,000 USD

Enterprise A and company B in Vietnam are two associated enterprises, the tax authority may determine the taxable income as follows:

Assuming that the tax authority determines the average net income rate of the garment industry is 10%.

The determined income = 98,000 USD x 10%

In cases where price irrationalities are discovered but there exist no conditions for the application of the above methods, the tax authority shall request the enterprise to produce the relevant vouchers and attest in writing the legality of the vouchers produced. Copies of the relevant vouchers shall be sent to the General Tax Department for the exchange of information with the tax authorities of other countries.

Part IV

TAX PAYMENT CURRENCY AND OTHER GUIDANCES

I. TAX PAYMENT CURRENCY

Foreign-invested enterprises and foreign business cooperation parties shall pay tax(es) in Vietnam dong.

Enterprises which are permitted by the Ministry of Finance to use foreign currency(ies) in their cost-accounting and book-keeping activities, when making tax declaration, shall have to convert such foreign currency(ies) into Vietnam dong at the time of declaration.

The conversion of a foreign currency into Vietnam dong or vice versa shall be effected at the average actual purchasing and selling rates on the inter-bank foreign currency market announced by the State Bank of Vietnam on the Nhan Dan (People) daily. For certain days on which the Nhan Dan daily is not published or published without announcement of exchange rate, the exchange rate applicable to the conversion shall be the preceding day�s exchange rate.

All budget revenues from the foreign-invested enterprises shall be accounted into the budget index according to the current regulations.

II. RESPONSIBILITIES OF FOREIGN-INVESTED ENTERPRISES AND FOREIGN BUSINESS COOPERATION PARTIES

1. Foreign-invested enterprises shall have to strictly observe the procedures for tax code-granting registration and tax registration with the tax authorities directly managing them according to the current regulations.

2. Within 5 days at the latest from the change of their goods lines for business or change of the locations of their executive head offices, the enterprises, their business affiliates or foreign business cooperation parties shall have to complete the tax registration procedures at the tax authorities of the provinces and centrally-run cities where their executive head offices are located (according to the form issued together with Circular No.79/1998/TT-BTC of June 12, 1998 of the Ministry of Finance).

3. To strictly comply with all the regulations on tax declaration in the course of business and production activities.

4. To present all accounting books and records and necessary documents related to the tax calculation and settlement at the request of the tax authority.

5. To pay in full taxes within the prescribed time limit.

6. To notify the tax authority of the decision on its dissolution or expiry of the project�s operation duration, and submit its final settlement report on time.

III. RESPONSIBILITIES AND POWERS OF THE TAX AUTHORITY

1. To guide the tax-payers to make tax registration and declaration according to the prescribed regime.

2. To examine tax declaration forms, accounting books and records as well as necessary documents for tax calculation. To be entitled to request the tax-payers to clarify unclear matters related to tax calculation.

3. To calculate tax and notify the tax-payers of payable tax amounts. To be entitled to fix payable tax amounts in cases where the tax-payers deliberately fail to make tax declarations within the prescribed time limit or make incomplete or inaccurate tax declarations, or fail to provide adequate and accurate information related to the tax calculation, or where the revenues are affected by abnormal financial and commercial transactions among the associated enterprises.

4. To record in writing and handle tax violations within its competence as prescribed by law.

5. To strictly enforce the tax legislation, thus ensuring its truthfulness, accuracy and objectiveness.

6. To inspect the registration of accounting regimes by enterprises and inspect the implementation of the registered accounting regimes.

7. To certify the tax amounts already paid by foreign investors at the request of such foreign investors.

IV. HANDLING OF VIOLATIONS AND SETTLEMENT OF COMPLAINTS

1. All violations of the tax legislation shall be sanctioned as follows:

- Failures to strictly comply with the regulations on tax registration at Point 1, Section II, Part IV of this Circular shall be sanctioned as prescribed in Decree No.22/CP of April 17, 1996 of the Government on sanctions against administrative violations in the field of tax.

- Failures to observe the regulations on tax declaration and payment shall be subject to pecuniary fines as prescribed in the Ordinance on Administrative Sanctions, the Government�s Decree No.22/CP and guiding documents currently in force.

- False declaration and evasion of taxes shall be fined up to 5 times the falsely declared or evaded tax amount.

- Delayed tax payment shall be subject to a fine of 0.1% (one thousandth) of the delayed tax amount for each day of delayed payment.

2. Competence to handle violations and complaints:

- Violations of tax regulations shall be handled by the tax authority directly managing the tax collection.

- Complaints of tax-payers about taxes shall be examined and settled by the tax authority directly collecting taxes. In cases where a tax-payer disagrees with the settlement, he/she shall be entitled to lodge a complaint to the higher-level tax authority or the Ministry of Finance or initiate a lawsuit according to provisions of law.

In cases where the complaints are lodged to the higher-level tax authority and the Ministry of Finance, the settlement decisions of the Minister of Finance shall be the final. Pending the settlement, the complainant shall have to strictly comply with the conclusion by the tax authority.

V. ORGANIZATION OF IMPLEMENTATION

The provincial/municipal tax departments shall have to guide foreign-invested enterprises and foreign business cooperation parties to strictly observe the provisions of this Circular.

They shall assign a contingent of full-time officials to manage the collection of taxes from foreign-invested enterprises and foreign business cooperation parties. These officials shall have to submit monthly, quarterly and year-end reports to the Ministry of Finance (the General Tax Department) on the situation of tax collection and other reports in service of the general management of foreign-invested enterprises and foreign business cooperation parties operating in their respective localities.

This Circular takes effect after its signing, replaces Circular No. 74-TC/TCT of October 20, 1997 of the Ministry of Finance, and shall be effective for the determination of enterprise income tax obligation in the fiscal year of 1999.

For the Minister of Finance

Vice Minister
PHAM VAN TRONG